Luxembourg CSSF reshapes organisational rules of UCITS management companies and AIFMs, enforces local substance requirements

September 03, 2018

The Commission de Surveillance du Secteur Financier (CSSF) issued a circular on 23 August 2018 (Circular), which consolidates into one document the requirements for Luxembourg UCITS management companies, self-managed UCITS, authorised alternative investment fund managers (AIFMs), and authorised internally managed AIFs (collectively, Managers)1. The Circular does not apply to AIFMs (and internally managed AIFs) that are registered only.2 The Circular consequently repeals circular 12/546 on the authorisation and organisation of UCITS management companies and formalises the administrative practice of the CSSF for authorising AIFMs.

In the light of Brexit, the Circular follows the 13 July 2017 guidelines of the European Securities and Markets Authority (ESMA) on regulatory onvergence (ESMA Opinion), and requires that Managers have a minimum of three locally-based, full-time-equivalent (FTE) staff. The Circular goes even further than the ESMA Opinion, however, by establishing requirements as to the number of mandates that Managers’ conducting persons and directors may devote to their mandates and professional activities. The Circular also addresses local substance for Luxembourg-based Managers and clarifies requirements for the delegation of functions for UCITS/AIFs as well as the Manager’s compliance function, internal audit function, IT and accounting.

In addition, the Circular sets out rules regarding: the authorisation process for Managers; requirements as to capital and proprietary funds; central administration; risk management and compliance functions; the internal audit; and obligations to prevent money laundering and terrorist financing (AMLCFT).

This Dechert OnPoint summarises the effect of substance and other key requirements included in the Circular on: (i) the governing body and management of a Manager and (ii) a Manager’s delegation of key functions, its investment and valuation committees, and its appointment of investment advisers.

Governing Body and Management of a Manager

The governing body of a Manager (e.g., its board of directors) must be composed of at least three directors (irrespective of the Manager’s legal form). While serving as directors of the Manager, a majority of such directors may not also be members of the governing body of a UCITS/AIF managed by the Manager.

In addition, the Circular limits the number of mandates in regulated entities and operating companies that such an individual may hold to a maximum of 20, and limits the aggregate time an individual may devote to his or her professional activities to 1,920 hours per year. These thresholds may be adjusted in the light of the complexity of the directorships and the technical and administrative support provided to the director to assume the relevant mandates.

The Circular defines the following as key functions of a Manager (Key Functions): portfolio management; risk management; administration of UCITS/AIFs; marketing; compliance; internal audit; 3 handling of complaints; AML-CTF compliance; valuation; IT; and accounting. Where a Key Function is outsourced (e.g., management of a UCITS/AIF, internal audit), the Manager cannot delegate responsibility for the oversight of the outsourced tasks.

Key Functions must be assumed by at least three FTEs in Luxembourg4 (who collectively must devote at least 120 hours per week to Key Functions). In addition, at least two FTEs in Luxembourg must qualify as conducting persons(collectively devoting at least 80 hours per week to Key Functions). The CSSF may grant a derogation regarding the residency of one of the conducting persons, if the Manager’s assets under management do not exceed €1.5 billion. However, derogation cannot be granted regarding the minimum requirement of three FTEs resident in Luxembourg.

Acting as one of the two mandatory conducting persons of a Manager cannot be combined with another conducting person mandate unless assets under management of each of the two Managers are below €1.5 billion.

With respect to conflicts of interest, the Circular reiterates that there must be a strict separation between portfolio management and risk management functions. In addition, the Circular clarifies that the conducting person to whom the internal audit function has been assigned cannot be entrusted with any of the following functions: compliance; AMLCFT; or risk management.

Letter Box Test, Requirements as to Delegation of Key Functions, Investment and Valuation Committees, Appointment of Investment Advisers

In addition to the requirement to allocate Key Functions at least to three FTEs resident in Luxembourg, the Circular emphasises that the letter box test must be assessed in light of the size of the teams dedicated to the Key Functions, by taking into account assets under management as well as the complexity and number of UCITS/AIFs (i.e., where assets are complex and the Manager manages a large number of UCITS/AIFs, the minimum criteria is likely not to be sufficient).

The Circular sets forth a number of tasks that cannot be delegated, including (among others): the supervision of delegates; determination of the risk profile of UCITS/AIFs; implementation and management of rules regarding conflicts of interest and best execution; and the exercise of good faith and due care in the fair valuation of investments.

Where Key Functions are delegated, the Circular specifies a list of minimum criteria to be considered when assessing the risks of delegation – the list contains both objective criteria (e.g., authorisations, shareholder structure, governance structure and management) and subjective criteria (e.g., the delegates’ reputation, competencies and capacities). The Circular further details the minimum requirements for due diligence when delegating portfolio management, administration, marketing and valuation, by providing a non-exhaustive list of items to be assessed and monitored for each of these Key Functions.

The Manager must have an investment decision process in place to determine the allocation of tasks between the Manager, its delegate and investment advisers. Where a Manager contemplates establishing an investment committee, the governance and the organisation of the investment committee must be in writing. Participants must include experienced members of the Manager who are resident in Luxembourg, but this does not prevent a Manager from appointing to the investment committee an experienced person who is not a member of the Manager. The Circular further recommends that the conducting person in charge of portfolio management should be a member of the Manager’s investment committee. In addition, where a member of the investment adviser appointed by the Manager joins the investment committee, he/she should have only an advisory role.

The Circular also sets minimum requirements for a Manager appointing an investment adviser. In accordance with the ESMA Opinion, the Circular points out it would not be sufficient merely to check compliance of transactions proposed by the investment adviser against the investment restrictions of the UCITS/AIF. Rather, the Manager must establish a procedure providing for a critical and independent review of the transactions proposed by the investment adviser. For Luxembourg UCITS/AIFs, the role of the Manager’s investment adviser must be described in the prospectus of the relevant UCITS/AIFs.

Similarly, when a Manager establishes a valuation committee, experienced members of the Manager who are resident in Luxembourg must be among the participants, although experienced persons who are not members of the Manager might also become members of such committee. According to the Circular, no person involved in the investment decision process should be part of the valuation committee. This also applies with respect to a person who is a member of the Manager’s investment adviser if such person is active on the investment side.

Irrespective of whether the administrator is appointed by the Manager or directly by the AIF, the Manager must carry out continuous due diligence checks on the administrator, covering (among other matters) a review of the administrator’s systems and processes to: calculate net asset values; select pricing sources; and carry out checks on investors in relation to the prevention of money laundering. When delegating marketing, a Manager must have procedures in place to ensure that marketing complies with applicable laws and regulations. Such procedures must cover, at a minimum, diligence checks on intermediaries and, where UCITS/AIFs are marketed in the EEA, determination of the target markets and review of the rules on remuneration and inducements under MiFID II. In addition, the Manager must file, on an annual basis, a list of intermediaries with whom it has a direct relationship. However, the Circular does not provide guidance for a Manager when the marketing of an AIF has not been entrusted to the Manager.

The Circular applies with immediate effect, from 23 August 2018. Unfortunately, as the Circular contains a number of new provisions, Managers, directors and conducting persons have not been given a reasonable period of time to adapt to the Circular. It is therefore important that priority is given to ensuring immediate compliance with the Circular. 


1) Circular 18/698 on the authorisation and organisation of fund managers, et al. The Circular also provides guidelines for: (i) management companies under article 125-1 of the Luxembourg law of 17 December 2010 on undertakings for collective investment, as amended; (ii) management companies and AIFMs providing discretionary portfolio management, (iii) branches of non-UCITS management companies from EEA member states; (iv) branches of management companies from third countries and (v) registrar agents in relation to anti money laundering and counter terrorist financing provisions.
2) Registered AIFMs are exempted from the scope of the Luxembourg law of 12 July 2013 on alternative investment fund managers, as amended, on the basis that assets under management, including any assets acquired through use of leverage, in total do not exceed a total threshold of €100,000,000 or €500,000,000 when the portfolios consist of AIFs that are unleveraged and have no redemption rights exercisable during a period of five years following the date of initial investment in each AIF.
3) Although article 62 of Commission Delegated Regulation 231/2012 only requires the establishment of an internal audit function where appropriate and proportionate, the Circular formalises the administrative practice of the CSSF that the establishment of an internal audit function is mandatory for all AIFMs.
4) Note that residency close to Luxembourg (so as to enable daily presence at the Manager’s premises) continues to be considered as constituting Luxembourg residency.
5) Conducting persons (dirigeants) are those persons who carry out the management of the Manager.

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